Should Investors Light Up With Altria?

By Ryan Guenette - September 13, 2012 | Tickers: MO, BTI, LO, PM, RAI | 0 Comments

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There is no disputing the facts. Smoking has been proven over and over again as a harmful activity, one that can be clearly linked to numerous types of cancers and a vast array of illnesses. However, companies that sell tobacco products have been able to sustain themselves through the years. One major player in this industry is Altria Group (NYSE: MO). Altria’s main holding is engaged in the manufacturing and sale of cigarettes and certain smokeless products in the United States. Other subsidiaries of the company include U.S. Smokeless Tobacco Company, Ste. Michelle Wine Estates Limited, and John Middleton Company. The company employs 10,000 people and is valued at $69.14 billion. Over the past year the company’s stock has risen 29.12%, dominating the S&P 500, which has only rallied 19.53% over the same period. So should investors light up with Altria?

Dwindling Fundamentals

In 2002, Altria reported earnings per share of $5.44. In 2012, the average analyst consensus believes the company will derive $2.07 per share from its business operations. This represents a 61.95% decrease in earnings over the curse of a decade. Based on these statistics, Altria’s compound annual growth rate (CAGR) is -9.21%, a troubling trend. Altria’s drastic loss in earnings over the past decade has been fueled by the company’s diminishing sales. The hard truth is that Altria is taking in less and less every year, and even if the company is able to significantly improve margins, it will not be able to completely offset the loss in sales. There does not appear to be any catalysts on the horizon for the company that would reverse this trend, as it is expected to continue into at least 2015.

Additionally, the company pays out a dividend that is the prime reason any investor is in it. Currently, Altria pays out quarterly dividends of $0.44, or an annual dividend $1.76, which at the current price, puts the dividend as yielding 5.18%. This is up from 2011’s annual dividend of $1.64, and has been raised consistently since the company began paying out its dividend in 1987. From this we can see Altria’s underlying financial deterioration, troubling sales trend, and massive dividend.

The chart below displays Altria’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.  

Courtesy of Zonebourse.com

Fundamental Shift in the Tobacco Industry

It is hard to believe, but once smoking was commonly though by the public to be a healthy habit. Doctors once actually went on television or spoke over the radio about the benefits of smoking. However, as time has changed so many things, the knowledge swirling around smoking has changed. Innumerable reports and studies have shown that smoking tobacco leads to hosts of cancers, diseases, and illnesses. Time and time again it has been shown that nothing good comes out of smoking. Smoking pollutes the environment, harms the people around the smoker and the smoker alike, and is overwhelmingly expensive. If one smokes a pack a day, buying each pack for $6.50, they will spend $2,372.50 a year on their hobby, not including taxes. Smoking is an expensive hobby that slowly kills the user. There are no advantages of smoking; however it will not be banned because of the huge revenue the government collects from tobacco taxes. There are much more immediate and important issues to face other than smoking, such as the fiscal cliff. The younger generation has access to information surrounding smoking, via the internet, and is wisely more commonly choosing to not pay to shorten their lives. All in all, while Altria may continue to derive millions from its customers into the future, it is not inconceivable to imagine a world where smoking is a severe rarity.

The chart below displays the total tobacco consumed by United States smokers over the years.

Courtesy of www.bluenc.com

Who sells the best smokes?

Compared to some of Altria’s most prominent competitors, such as: Reynolds American (NYSE: RAI), Lorillard (NYSE: LO), Philip Morris Incorporated (NYSE: PM), and British American Tobacco (NYSEMKT: BTI), Altria’s compares relatively in-line.

In terms of growth, Reynolds American is the industry leader, while Altria is the industry laggard. All companies in the industry pay out large dividends, with Altria possessing the largest dividend, and Lorillard possessing the fastest growing dividend. In the fundamental ratio comparison, Lorillard is the industry bargain, while British American is trading at a premium to its peers. When growth is taken into account, Philip Morris is trading at a bargain, while Reynolds American trades at a premium to its peers. In the net profit margin comparison, Philip Morris stands out the upside, while Reynolds American stands out to the downside.

The Foolish Bottom Line

More and more people in the United States finally comprehend the full dangers of tobacco each day. Consumers now realize that smoking is a costly and deadly endeavor, yet millions of Americans still light up every day. Altria provides these smokers with their products, and have made millions. Their financial strength is floundering, yet the company’s dividend is massive. The broader market trend is not in Altria’s favor, as more educated generations are realizing the danger of cigarettes. While the company’s dividend may be tempting, Altria is a company caught on the wrong side of a long-term fundamental shift, and with less and less smoking, less and less money will be on Altria’s balance sheets.  

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